We have seen many companies and contractors sharing their worries since the announcement of the updated IR35 legislation in 2019, an update to the legislation which was launched by HMRC in 1999. This article is here to help you understand the legislation itself, and if it will affect you, your business, or the people you are currently using within your company.
Before the April 2020 legislation update, IR35 was implemented only in the public sector. If a contractor worked for a private company, then freelancers and contractors were the ones who had to confirm if they fell under the same tax requirements as employees of the companies they worked for. It was in their hands to confirm if they fell under the legislation or not. This was to help clamp down on freelancers that were working through a private limited company for clients, paying lower income tax and no National Insurance, whilst actually getting all of the same benefits as if they were a full-time employee. Since April 2020, the changes that have now been implemented have flipped to the company or charity hiring these contractors confirming if the contract/freelancer is self-employed or is, in actual fact, an employee and therefore liable to higher income tax, and required to pay National Insurance. So if a contractor works through an intermediary, (the size of the intermediary or PSC does not have any impact). The size of the end client (the company receiving the services) matters. If the end client is medium or large with a
it is their responsibility to do the Status Determination Statement (SDS) and assess for IR35, deduct any applicable taxes for any contractor they are hiring, so the clients’ income could be affected indirectly. If the end client is small, the responsibility to determine IR35 remains with the PSC, the small company exemption does not mean there is no responsibility to determine IR35 status, it means it does not apply to the end client.In practice, we see that when it’s the end client determining the status, they are indeed taking the safest approach and consider all previous contractors via limited companies as employees now. Looks like acceptance of being wrong for all those years.
When using a freelancer or contractor, that runs a limited company, you will often have several things in place that prove they are not an employee. There are 4 key factors:The two most important criteria are
To be self-employed both tests - control, & mutuality of obligation - have to fail. i.e. there should be no control and no mutuality of obligation between the contractor and the client. The further two factors are:
However, if the freelancer is hired through their limited company, and they carry out work on structured hours stated by you, are told the specific tasks they must work on each day, as well as where they must work, they may well fall under the “disguised employee” banner and therefore may be found to all inside the IR35 remit.
Companies (and some charities) in the private sector with a turnover of over £10.2m, with balance sheet assets of more than £5.1m or with more than 50 employees will need to identify if their contractors have an IR35 status. However, for smaller companies, it is the job of the contractor to identify their status. The legislation only takes effect if the contractors or freelancers you are using have a limited company, when you use sole traders then IR35 is of no matter here, too. In summaryAlthough all of the news is stating that IR35 is the fall of freelancers everywhere you need to take into account the actual requirements of the legislation before worrying if it will affect your freelance business or the people you use within your business who are contractors or freelancers. Remember - it affects freelancers and contractors who run Limited companies, and is a requirement for the medium and large companies, some charities & select third companies to identify if their contractors have an IR35 status & produce a Status Determination Statement. HMRC has announced they will not be implementing fines for the first 12 months of the new legislation unless they deem that there has been evidence of deliberate non-compliance. If you are a contractor and work for companies that are not required to deem your status themselves, then it is your duty to do so. We hope this puts you at ease in terms of the newly updated IR35 legislation and will help you to understand in more detail whether or not it may affect you. We highly recommend you have professional support and advice if you feel that this may in any way affect you or your company.
